Ok after reading through the comments here http://digg.com/software/Vista_upgra...es_your_XP_key
I found out that idea that your older OS key is invalidated after upgrading to Win 7 and can never be used again is false. After upgrading it says it is illegal to use your older OS but it does not invalidate the key to never use it again. If I had to reinstall the OS in the future I still could. So all is ok again.
I'll just use the upgrade disc on my Win 7 RC install on this machine and then make a backup disc image. If I ever need to reinstall in the future I will either reimage the drive with my backup Win 7 image or install Win XP from my old disc then upgrade it.